Canada's housing market 'threatens the financial stability' of the country

A construction worker works on building new homes in Calgary, Alberta, May 31, 2010. Gross domestic product grew at a 6.1 percent annual rate, the biggest jump since the fourth quarter of 1999, and by 1.5 percent compared with the fourth quarter of last year, Statistics Canada said on Monday.
Todd Korol/Reuters
The Paris based Organisation for Economic Co-operation and Development (OECD) released their newest quarterly outlook, and did so in a few packages. The first one, Handout For The Press with Summary contains a positive outlook highlighting growth. The industry packages wasn't so optimistic, instead saying things like Canada's housing market is "threatening the financial industry." Since most outlets already covered the press packet, I guess we'll be the bearers of bad news and dig into the industry versions. According to the OECD, Canada's housing market threatens the economy, and 2017 is going to be a terrible time for the average household.

Expect A Housing Crisis

They definitely didn't sugar coat the housing situation in Canada. The report explained that we should expect a "disorderly housing market correction." They go on to say that this is due to the "notably over-valued Vancouver and Toronto markets," which they estimate to be a third of the national market. They then went on to explain how it "threatens the financial stability" of Canada.

My editor always says a chart needs an explanation, you can't just say "look at it." Apparently the OECD feels a different way. They basically made the statements in the last paragraph with few qualifying statements. Then just showed a chart called Vancouver and Toronto Housing Markets Are Overheating. Subtle.

Better Dwelling

Residential Investment Stagnates

Residential investment growth in Canada continues to stagnate, but that's only half the story. The OECD divides the Canadian economy into two categories - BC and Ontario, and "the rest of Canada." The former is seeing investment growth of around 8.5%, which is very robust. Unfortunately, the rest of Canada saw a growth of -8.28%. Now that mortgage interest rates are on the rise, it'll be interesting to see if BC and Ontario households can continue to grow, or if interest in those expensive homes kill any free capital flow.

Better Dwelling

Household Debt Didn't Get Better

OECD is also worried about the economy and mounting household debt. While they did note that Canada has stable growth, it's projected to see the third slowest growth in the G20. In their opinion, this creates a greater concern when paired with massive household debt.

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You're likely aware that Canada has the highest household debt in the G7, with most of it mortgage based. Well, the big concern expressed is any rise in unemployment or mortgage interest rates could result in strained households unable to pay their mortgages. Since rates are already rising, and Finance Minister Charles Sousa said they would over the next few years - we should probably take that one seriously.

Everyone from chicken farmers to China's state media have been warning Canadians of these issues, so it shouldn't be a big surprise. Although some people need to hear it from a big multi-national organization before they listen. Still convinced Toronto and Vancouver are the next Manhattans? Good for you, I respect your enthusiasm.

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